|
|
|
|
SPEAKING FREELY
Why
oil prices are barreling up
By
Andrew McKillop
Speaking Freely is
an Asia Times Online feature that allows guest
writers to have their say. Please click here
if you are interested in
contributing.
LONDON - In the past
week, oil prices have regained about US$3 a barrel
after hitting a low of $45. Apart from the
perennial US weather factor, positive sentiment
was reinforced by IEA (International Energy
Agency) data revising previous forecasts for world
oil demand growth in 2005 by 80,000 barrels per
day, or 0.08 million barrels/day (mbd), to the
suspiciously modest figure of 1.52 mbd.
This is hard to fathom because the IEA
also raised its final estimate of world demand
growth in 2004 to 2.68 mbd. In percentage terms,
growth in 2004 was very close to 4%, the highest
for over 25 years. This number conflicts with
forward planning ideas and beliefs of the IEA and
other energy players - especially the world's 10
biggest oil corporations. None of these players
plan for demand growth beyond 1.75% per year.
Some, such as BP and ENI, still claim that the
"normal" long-term growth is about 1.3% per year.
On the consumer side, to back the notion
of slow growth being a fixed paradigm, oil users
are everywhere thought to show "price elastic"
response to higher prices. That is, they cut their
consumption as prices rise. On the supply side,
the same high prices are expected to bring new and
big suppliers into the market. If this does not
happen, we have an oil crisis. This pre-crisis
context is directly reflected in the market by
rising volatility on a longer-term upward price
profile. The IEA forecast of growth in 2005
dropping about 42% against 2004 is, we can
surmise, purely wishful thinking.
The
Organization of Petroleum Exporting Countries
(OPEC) is usually wheeled into the pricing melee
by saying it will now "defend" $40/barrel, after
waiting until December 2004 to say it was no
longer "defending" a price range of $22-28/barrel.
But the question is: what spare capacity does OPEC
really have? This raises the key question as to
what exactly OPEC's current 11 members (OPEC-11)
produce and export. Using data from the Oil &
Gas Journal on world daily average production in
2004 and 2003, only Iran, Qatar, Kuwait and Saudi
Arabia are credited with production hikes of over
3% in 2004, excluding the very special case of
Iraq. For Oil & Gas Journal, there was a 55%
increase in Iraq's daily average production to
about 2.05 mbd in 2004, while EIA (Energy
Information Administration) and the DoE
(Department of Energy) figures give about 1.55
mbd, almost identical to the 2003 average output.
BP places Iraq's 2003 production at a daily
average of 1.33 mbd. This is exactly half the
growth in world daily average oil demand in
January-December 2004.
Any production
numbers for OPEC are subject to the key question:
net or gross? Iraq, for example, has soon
recovered pre-war domestic oil demand of about
0.65 mbd despite shattered economic infrastructure
and 60% unemployment. US occupation forces in Iraq
are credited with about 0.35 mbd demand. During
the economic reconstruction phase that may now be
about to start, Iraq's domestic demand will
certainly increase rapidly. Normal economic
development in oil producer countries is of course
oriented to energy-intensive activities. Saudi
Arabia's domestic oil demand in 2004, according to
BP, increased by 5.5%, much more than its 3.2%
hike in daily average oil production. Kuwait's
domestic oil demand, again according to BP, has
been growing at over 10%/year of late (19.8% in
2003), dwarfing all increases of its national oil
production.
This pattern of domestic
demand increasing much faster than production is
common to more than nine out of 10 oil producers,
both OPEC and non-OPEC. Net exports, therefore,
will always tend to grow slower than national
production. Conversely, world oil import demand is
significantly higher than consumption demand. In
2004, for example, world oil demand rose 2.68 mbd,
but import demand growth was about 3.1 mbd.
This is related to the question of actual
declines in production. For the majority of
non-OPEC producers - in fact nearly all, except
Russia and some Central Asian producers - rates of
decline are stubbornly high despite much-vaunted
technology improvements. Where the producers are
also net importers (as in most cases), declining
home production raises their import demand. Take
the Organization for Economic Cooperation and
Development's three largest producers: the US,
Norway and the United Kingdom. These are losing
oil output capacity at about 4% to 5.5% per year.
In the case of Norway and the UK, these rates are
certain to increase sharply, despite any
conceivable technology upgrade through simple
geological limits. In the case of China and India,
annual declines in national oil production are
also tending to rise while domestic consumption
grows at 5%-9% a year.
One of the biggest
problems facing the IEA, the EIA and a host of
analysts and "experts" who claim that "high prices
cut demand" either directly or by dampening
economic growth is that this does not happen in
the real world. Since early 1999, oil prices have
risen about 350%. Oil demand growth in 2004 at
nearly 4% was the highest in 25 years. These are
simple facts that clearly conflict with received
notions about "price elasticity". World oil
demand, for a host of easily-described reasons,
tends to be bolstered by "high" oil and gas prices
until and unless "extreme" prices are attained.
This is the real fundamental, on the demand side.
Supply-side fundamentals are equally clear
and opposed to the notions of "unlimited" growth
of supplies being achievable. The net readout from
this: rising prices and the dusting off of energy
conservation and renewable energy development
strategies. Both of these are sorely needed to
limit adverse climate change, which is now at
least better understood and feared. Time, however,
is sorely limited, and the push factor of much
higher oil prices due to Middle East and world
events will certainly play a lot bigger role than
the "fundamentals" of US winter trends.
Andrew McKillop is
founder-member of the Asian Chapter, International
Association of Energy Economists. He can be
reached at xtran04@yahoo.com
(Copyright Andrew McKillop 2005)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing. |
|
|
|
|
|
|
|
 |
|
|
|
|
|
All material on this
website is copyright and may not be republished in any form without written
permission.
© Copyright 1999 - 2005 Asia Times
Online Ltd.
|
|
Head
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong
Kong
Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
|
Asian Sex Gazette Sex and Entertainment News
|
|
|
